Government ordered changes to report on Barclays use of loan scheme

Business department told auditors to amend report on Barclays' use of state-backed scheme to reflect bank's response

A government department ordered changes to the report of an independent investigation into a loan made by Barclays under a state-backed lending scheme in order to reflect the bank's views, the Guardian has learned.

An MP has said that amendments undermined the relationship between ministers and civil servants, and called for an inquiry into the process.

The Department for Business, Innovation and Skills (BIS) had asked the auditing firm RSM Tenon to investigate whether a 2006 Barclays loan to a company owned by businessman Jeffrey Morris contravened the now defunct small firms loan guarantees scheme (SFLG). The programme cost the taxpayer nearly £200m in compensation for banks, with Barclays claiming £69,471 for the Morris loan when the company defaulted on it in 2009. There is nothing to suggest Barclays behaved improperly.

RSM Tenon delivered its report at the end of October last year, but BIS asked the firm to amend it. The Guardian has learned that within three hours of receiving Barclays' response to its report, BIS told RSM Tenon to "review and amend the report to reflect this response".

RSM Tenon submitted its amended report a month later. According to an internal BIS email, the altered report "reflects a 'softening' towards Barclays' position following recent discussions". Alec Shelbrooke, Conservative MP for Elmet and Rothwell, who has been pursuing Morris's case for almost a year,said: "Ministers need to be able to trust the reports given to them by civil servants and this episode fundamentally undermines that relationship. The permanent secretary now needs to launch a full investigation."

The scheme for startup businesses, which guaranteed banks a return if the borrower defaulted, cost the taxpayer at least £183m between 2006 and 2008. The Guardian reported on the loan last year, prompting BIS to instruct RSM Tenon to carry out a review.

It found that Barclays believed Morris had a net worth of more than £20m at the time the loan was made, but an SFLG loan was only permissible if the borrower had exhausted all other forms of collateral.

The government then guaranteed to repay 75% of the amount outstanding on the loan to the bank if it went bad.

The report was immediately shown to Barclays and the bank was asked for its response.

The notes of a conference call between BIS officials, RSM Tenon and Barclays held on 31 October reveal that Barclays asked for time to address the issues in the report. BIS declined to comment.

On 9 November Barclays produced its response to the RSM Tenon review. It attempts to discredit a previous internal reportby Barclays, which had concluded Morris had a net worth in excess of £20m, which should have precluded Barclays from offering a loan under the SFLG. In a statement, Barclays said: "RSM Tenon audited the loan based on all available information and concluded that 'the loan and the business appear to meet the eligibility criteria of the scheme at the time' and that they had 'no reason to believe that the bank did not follow their normal commercial lending processes, as applicable and expected of the lenders in 2006'.

Barclays was accused of lending multimillionaire businessman Jeffrey Morris (above) £200,000 under scheme meant for budding entrepreneurs"Recent evidence provided by Mr Morris' solicitors to BIS and RSM Tenon did not change this conclusion."Separately, Barclays is seeking to enforce a multimillion pound high court judgment obtained against Mr Morris, but we are unable to comment on this as it is subject to on-going litigation."On 21 November last year RSM Tenon submitted the amended report, including the new line that the auditor had "no reason" to believe that the process was flawed. It added: "Overall we have no reason to believe the bank did not follow their normal commercial lending processes." The amended report was released under the Freedom of Information Act in January this year but was heavily redacted to exclude some of RSM Tenon's more serious continuing concerns.

Article Source : http://www.guardian.co.uk

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